Course Introduction
Managerial Economics Exam Preparation Guide
Managerial Economics explores the application of economic theory and methodology to business administration practices and decision-making. The course emphasizes the use of microeconomic and macroeconomic concepts to analyze business problems, optimize resource allocation, and maximize firm value. Key topics include demand and supply analysis, production and cost functions, pricing strategies, market structures, risk analysis, and the impact of government regulation. Through real-world case studies and quantitative techniques, students learn how economic principles inform managerial decisions and strategic planning in various organizational contexts.
Recommended Textbook
Microeconomics Today The Macro View 17th Edition by Roger LeRoy Miller
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Page 2
Chapter 1: The Nature of Economics
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Q1) Which of the following statements concerning economic models is FALSE?
A)Economic models must provide usable predictions.
B)Economic models are based on pure fact and no assumptions.
C)Economic models are tested empirically.
D)Economic models relate to how people behave.
Answer: B
Q2) Which of the following is an aggregate?
A)the number of shoes in one man's closet
B)the bushels of apples one farmer sells
C)the price of a particular textbook
D)the total production of all goods and services
Answer: D
Q3) Which of the following is an example of a normative economic statement?
A)Lower income tax rates will generate greater income tax revenue to the government.
B)Income tax rates should be lower because that will increase government revenue.
C)Lower income tax rates yield a larger federal government deficit.
D)The federal budget deficit has increased every year for the last twenty years.
Answer: B
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3
Chapter 2: Scarcity and the World of Trade-Offs
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Q1) Comparative advantage is
A)when a country can produce a good at a lower opportunity cost compared to other countries.
B)when a country can produce all goods more quickly than any other country.
C)when the production possibilities curve shifts outward to the right.
D)only for individuals and not countries.
Answer: A
Q2) Would a country with an absolute advantage in the production of all goods and services trade with other countries? Explain.
Answer: Yes.Trade is based on comparative advantage,not absolute advantage.While it is possible for a country to have an absolute advantage in all goods,it can only have a comparative advantage in one (based on a two good model).When nations specialize in what they have a comparative advantage and then trade with other nations,their production possibilities curves move outward,which yields greater production and consumption possibilities.
Q3) "Economics deals with human needs." Do you agree or disagree? Why?
Answer: Disagree.The concept of needs is difficult to define objectively for each person,so that economists consider people's unlimited wants instead of their needs.
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Chapter 3: Demand and Supply
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Q1) The law of demand shows that there is
A)an inverse relationship between price and profit.
B)an inverse relationship between price and resource cost.
C)an inverse relationship between price and quantity demanded.
D)a direct relationship between price and quantity demanded.
Answer: C
Q2) State the law of demand and illustrate it.Explain what is meant by the term "price" in the law of demand.
Answer: The law of demand states that when the price of a good increases,people buy less of the good,other things equal,and when price of a good decreases,people buy more of it.An increase in the price of gasoline would lead people to buy less gasoline.Price means "relative price," or the price of the good in terms of other goods.People make their decisions on the basis of relative prices and not on the basis of the money price.
Q3) A market demand schedule for a product indicates that
A)as the product's price falls,consumers buy less of the good.
B)there is a positive relationship between price and quantity demanded.
C)as a product's price rises,consumers buy more of the good.
D)there is a negative relationship between price and quantity demanded.
Answer: D
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Chapter 3: Extensions of Demand and Supply Analysis
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Q1) Suppose that an early frost damages the Florida orange crop.As a result,the price of California oranges increases.Ceteris paribus,which one of the following statements best explains this situation?
A)The supply of Florida oranges decreased,causing the supply of California oranges to increase,which resulted in a higher price.
B)The supply of Florida oranges decreased,causing the supply of California oranges to decrease,which resulted in a higher price.
C)The supply of Florida oranges decreased,causing their price to increase,and thus causing the demand for California oranges to increase.
D)The demand for Florida oranges fell because of the freeze,and this led to a higher demand for California oranges.
Q2) Which of the following is an example of a price ceiling?
A)The minimum wage
B)Agricultural price supports
C)Rent controls
D)None of the above is correct
Q3) Explain how agricultural price supports work and what the effects of the supports are.
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6
Chapter 4: Public Spending and Public Choice
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Q1) In a free market system,competition generates economic efficiency only when
A)individuals take into account the full opportunity cost of their actions.
B)consumers are motivated by a sense of the greater good,not their own self-interest.
C)firms are motivated by a sense of the greater good,not their desire for profit.
D)economic decisions are taken out the hands of individuals and placed in the hands of government officials.
Q2) In the spring,I enjoy the fragrance coming from my neighbors' flowers.The fragrance is is an example of
A)a negative externality.
B)a private good.
C)the need for antitrust legislation.
D)a free rider.
Q3) A possible solution to the problems of external benefits is
A)to tax those receiving the extra benefits.
B)production of the good by government.
C)effluent fees.
D)to restrict the amount of the good through direct government regulation.
Q4) How does a government-sponsored good differ from a public good?
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Page 7
Chapter 5: Funding the Public Sector
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Q1) The marginal tax rate and the average tax rate are the same under a
A)progressive income tax system.
B)regressive income tax system.
C)proportional income tax system.
D)none of the above.
Q2) Which of the following is an argument that the incidence of corporate taxation falls entirely on consumers?
A)Corporations pass their tax burdens on to consumers by charging higher prices equal to the amount of the tax.
B)Corporations pass their tax burdens on to consumers because consumers ultimately work for the corporations.
C)Corporations always evade taxes so that consumers ultimately bear the tax burdens as taxpayers.
D)Most taxes on consumers are collected by corporations through sales taxes.
Q3) Social Security contributions are
A)a voluntary dollar amount that people contribute towards Social Security.
B)entirely paid by your employer.
C)mandatory taxes partially paid out of workers' wages and salaries.
D)collected only from people earning more than $80,000 a year.
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Page 8
Chapter 6: Demand and Supply Elasticity
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Q1) Elastic demand implies
A)that a one percent increase in price results in a smaller than one percent decrease in quantity demanded.
B)that a one percent increase in price results in a larger than one percent decrease in quantity demanded.
C)that a one percent cut in price results in a larger than one percent increase in quantity demanded.
D)that a one percent decrease or increase in price induces no change in total revenue.
Q2) Refer to the above table.What is the absolute price elasticity of demand when price changes from $6.00 to $6.50?
A)1.60
B)1.00
C)0.65
D)0.60
Q3) Why is the price elasticity of supply greater if there is more time for adjustment to an increase in the price of an item?
Q4) Explain the three possible ranges for price elasticity of demand.
Q5) Price elasticity of demand is measured using percentage changes.Why?
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Chapter 7: Consumer Choice
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Q1) If a consumer concludes that the marginal utility of the last dollar spent on vegetables exceeds the marginal utility of the last dollar spent on junk food,he will respond by
A)consuming relatively more junk food and fewer vegetables.
B)consuming relatively more vegetables and less junk food.
C)consuming equal amounts of vegetables and junk food.
D)halting consumption of junk food altogether.
Q2) Along a given indifference curve,a consumer reduces the quantity of one good in favor of more units of the other.In this situation
A)the marginal rate of substitution falls.
B)the marginal utility of the first rises and the marginal utility of the second good falls.
C)Total utility rises.
D)Both A and B are correct.
Q3) When you tell your mother,"I'll never be tired of your cooking," you are saying the
A)total utility of her cooking to you is constant.
B)total utility of her cooking to you is equal to 1.
C)marginal utility of her cooking to you is 0.
D)marginal utility of her cooking to you will never be 0.
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Page 10
Chapter 8: Rents, profits, and the Financial Environment of Business
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Q1) Economic profit is always
A)greater than accounting profit.
B)equal to accounting profit.
C)less than accounting profit.
D)equally likely to be either greater or less than accounting profit.
Q2) In analyzing land rent,David Ricardo constructed a model based on
A)perfectly elastic demand for land.
B)a perfectly elastic supply of land.
C)land being available in infinite quantities.
D)the supply of land being perfectly inelastic.
Q3) In economics,interest refers to all of the following EXCEPT
A)the payment for current rather than future command over resources.
B)the cost of obtaining credit.
C)the return paid to owners of financial institutions.
D)the return paid to the owners of capital.
Q4) Numerically,the dominant type of business enterprise in the United States is
A)the corporation.
B)the partnership.
C)the proprietorship.
D)the multinational corporation.
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Chapter 9: The Firm: Cost and Output Determination
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Q1) The total cost of the firm
A)includes explicit costs but excludes implicit costs.
B)includes implicit costs but excludes explicit costs.
C)includes implicit and explicit costs.
D)includes implicit and explicit costs but excludes a normal rate of return on investment.
Q2) In the above figure,the long-run cost curve between points E and F illustrates
A)diseconomies of scale.
B)diminishing marginal product.
C)constant returns to scale.
D)economies of scale.
Q3) Suppose that one worker can produce 15 cookies,two workers can produce 35 cookies together,and three workers can produce 65 cookies together.What is the average product of the first two workers?
A)15 cookies
B)20 cookies
C)17.5 cookies
D)35 cookies
Q4) "In the short run,a firm cannot change any of its inputs." Do you agree or disagree? Explain.
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Chapter 10: Perfect Competition
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Q1) The value of total output decreases when labor leaves one industry and goes to another and capital leaves the second industry and goes to the first.This indicates that
A)the first situation was not efficient.
B)the second situation is efficient.
C)price is greater than marginal cost.
D)it would be efficient to return to the first situation.
Q2) An industry whose total output can be increased without a change in long-run per-unit costs is a(n)
A)increasing-cost industry.
B)constant-cost industry.
C)break-even cost industry.
D)decreasing-cost industry.
Q3) A decreasing-cost industry will have
A)a perfectly elastic long-run supply curve.
B)a perfectly inelastic long-run supply curve.
C)an upward sloping demand curve in the long run.
D)a downward sloping supply curve in the long run.
Q4) Describe and explain how a perfectly competitive firm's demand curve is found.
Q5) How do we determine whether a firm has maximized profits?
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Chapter 11: Monopoly
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Q1) A monopoly will maximize profits at the level of output at which
A)MR = MC.
B)MR = AFC.
C)MC = ATC.
D)MC = P.
Q2) A patent on a product gives a firm
A)protection from having the invention copied or stolen for a period of 20 years.
B)economies of scale in producing the product.
C)excessive profits in the long run.
D)the power to impose a tariff on a competing product.
Q3) Selling a product at different prices when the price difference is unrelated to costs is a practice known as
A)price fixing.
B)price monopolization.
C)price discrimination.
D)price differentiation.
Q4) What is the social cost of a monopoly? Explain.
Q5) "Price discrimination is the same as price differentiation." Do you agree or disagree? Why?
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Chapter 12: Monopolistic Competition
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Q1) In the above figure,this profit-maximizing monopolistic competitive firm will realize an economic profit of
A)-$1,400.
B)$2,100.
C)$1,400.
D)$700.
Q2) Firms that produce an information product experience short-run economies of operation because
A)the firm will always produce in the decreasing portion of the marginal cost curve.
B)of the U-shaped nature of the average total cost curve.
C)of the U-shaped nature of the average variable cost curve.
D)the average total cost of producing and selling the product declines as output increases.
Q3) Advertising is used by firms in a monopolistic competitive industry to
A)differentiate their product from those of competitors.
B)increase brand loyalty.
C)increase demands for their individual products.
D)all of the above
Q4) Explain how information products are "special."
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Chapter 13: Oligopoly and Strategic Behavior
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Q1) Which of the following is not true of an oligopoly?
A)They advertise their product.
B)The firms recognize their interdependence.
C)A few firm account for a large portion of the total output.
D)Firms are price takers.
Q2) Refer to the above figure.Ajax and Greenco are oligopolists.Above you are given the payoff matrix for the two firms giving the payoff associated with different pricing strategies.What is the best strategy for Greenco if Ajax decides on charging a high price?
A)High price
B)Low price
C)There is no best strategy.
D)Not enough information is given to determine the best strategy.
Q3) In industries in which strong network effects exist,which industry structure is likely to emerge?
A)Perfect competition
B)Monopoly
C)Monopolistic competition
D)Oligopoly
Q4) Why do cartels often break down?
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Chapter 14: Regulation and Antitrust Policy in a Globalized Economy
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Q1) According to the capture hypothesis,
A)regulators eventually support the views of consumers instead of the firms or the taxpayers,regardless of the reasons why the regulatory agency was established.
B)regulators support the view of the regulated firms all along because that is the reason the regulatory agency was established.
C)regulators eventually support the views of the regulated firms instead of the consumers or taxpayers,regardless of why the regulatory agency was established.
D)regulators eventually support the views of either the firms or the consumers,but at the expense of the taxpayers,regardless of the reasons why the regulatory agency was established.
Q2) U.S.government regulation of social and economic activity
A)only began after World War II.
B)costs less now than it did in the 1980s.
C)has increased steadily since 1970.
D)is confined to antitrust law.
Q3) Why do government regulators not enforce marginal cost pricing for natural monopolies? What are the common regulatory solutions?
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Chapter 15: The Labor Market: Demand, supply and Outsourcing
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Q1) Marginal revenue product is
A)marginal physical product multiplied by marginal revenue.
B)marginal physical product multiplied by average variable cost of the product.
C)the price of the product.
D)the total revenue from the sale of the product sales.
Q2) An industry utilizes capital and two types of labor.Unskilled labor is a substitute for capital while the skilled labor is complementary to capital.An increase in the price of capital will
A)cause the demand for labor to increase,raising wages of both skilled and unskilled labor.
B)cause the wage of unskilled labor to rise relative to the price of skilled labor.
C)induce the firms in the industry to cut back on all levels-capital,unskilled and skilled labor.
D)cause the demand for skilled labor to rise and the demand for unskilled labor to fall.
Q3) What would make the demand for labor more elastic?
Q4) Explain the efficiency wage theory.
Q5) What can cause the demand curve for labor to shift? Explain.
Page 18
Q6) What is marginal factor cost? How is it related to the supply curve of an input?
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Chapter 16: Unions and Labor Market Monopoly Power
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Q1) In an analytical sense,unions can be thought of as A)setters of minimum wages.
B)monopoly buyers of workers.
C)generators of inflation.
D)monopsonies.
Q2) If a union negotiated a wage above the market equilibrium wage,we would find
A)a surplus of laborers at the negotiated wage.
B)a shortage of laborers at the negotiated wage.
C)higher efficiency of labor at the negotiated wage.
D)lower worker productivity at the negotiated wage.
Q3) According to the above table,the marginal factor cost of the eighth worker is A)$27.00.
B)$48.00.
C)$168.00.
D)$216.00.
Q4) According to the above table,the marginal factor cost of the seventh worker is A)$24.00.
B)$126.00.
C)$42.00.
D)$168.00.
Page 19
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Chapter 17: Income, poverty, and Health Care
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Q1) The way income is allocated among the population is called the A)income curve.
B)income spread.
C)distribution of income.
D)Gini allocation.
Q2) In the above figure,the curve that represents the most income equality is A)a.
B)b.
C)c.
D)d.
Q3) If we include cash benefits and in-kind benefits available to low-income people,the share of the U.S.population in poverty
A)drops dramatically.
B)increases somewhat.
C)increases dramatically.
D)does not change.
Q4) How does the distribution of wealth differ from the distribution of income in the United States?
Q5) Why have health care costs risen so much in recent years?
Q6) How is moral hazard related to health care?
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Chapter 18: Environmental Economics
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Q1) Which of the following statements is true about the relationship among external,internal and social costs?
A)Social costs will always be higher than external costs.
B)Social costs will always be higher than internal costs.
C)Internal costs will always be higher than external costs.
D)Internal costs will never equal external costs.
Q2) Endangered species are likely to be
A)private property.
B)common property.
C)both private and common property.
D)neither private nor common property.
Q3) A good that has social costs that are less than private costs has a quantity that is A)too high.
B)too low.
C)just right.
D)equal to zero.
Q4) Suppose people value clean air more as their incomes increase.What would happen to the optimal amount of clean air as a country develops economically? Is there an economic prediction we can make from this?
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Chapter 19: Comparative Advantage and the Open Economy
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Q1) The organization that settles trade disputes between countries is the A)World Bank.
B)World Trade Organization.
C)International Monetary Fund.
D)United Nations.
Q2) In general,who will benefit as the result of a tariff?
I.Domestic producers
II.Domestic consumers
III.The domestic government
A)I only
B)II only
C)both I and III
D)both II and III
E)All of the above are correct
Q3) Dumping typically occurs because
A)the exporting country raises its prices to increase profits.
B)the exporting country usually is experiencing a recession and has excess production.
C)the importing country is experiencing a recession.
D)the importing country has assessed significant tariffs.
Page 22
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Chapter 20: Exchange Rates and the Balance of Payments
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Q1) Under a flexible exchange rate system,an increase in the value of the U.S.dollar in terms of other currencies is referred to as
A)a depreciation of the U.S.dollar.
B)an appreciation of the U.S.dollar.
C)a monetizing of the U.S.dollar.
D)a devaluation of the U.S.dollar.
Q2) If the price of the Brazilian real is 60 cents and a U.S.resident purchases a Brazilian-manufactured item for 60,000 real,there will be
A)a quantity demanded of 60,000 real and a quantity supplied of $60,000.
B)a quantity demanded of 60,000 real and a quantity supplied of $36,000.
C)a quantity demanded of 60,000 real,but we cannot determine the effect in the market for dollars.
D)a quantity supplied of 60,000 real and a quantity demanded of 60,000 yen.
Q3) In the above table,the balance on the capital account for Country X is ________ billion dollars.
A)-85
B)-150
C)+75
D)-200
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